FRB: G.19 Release– Consumer Credit — March 7, 2012

Here’s the bottom line. The amount owed the government went up $28 billion and everything else stayed the same or went down. It looks like student loans is the only driver of consumer borrowing.

Consumer credit increased at an annual rate of 8-1/2 percent in January. Revolving credit decreased at an annual rate of 4-1/2 percent, while nonrevolving credit increased at an annual rate of 14-3/4 percent.

FRB: G.19 Release– Consumer Credit — March 7, 2012

Was our last economic boom due to consumer debt?

When I read the post, A Deep Look At Revolving Credit, And What It Means For Consumer Spending, the graphs inspired me to try my hand at answering some questions I have been about the importance of consumer debt to our last economic expansion.  So the first thing I did was to create a graph using FRED of the revolving debt versus the S&P 500. To avoid issues with scaling and different units, I told FRED to scale the graph using the latest available data as 100. From the graph I could see that there was a strong relationship between the two lines but I had some other questions. How much of the increased debt was due to the increase in population and inflation? My solution was to create a per capita revolving credit estimate by dividing the revolving credit by the population of wage earners and scaling it to 100 and adding a separate line for the inflation index. Here is the final result.



Now this is an interesting graph. We can see that the S&P 500 and the per capita revolving credit have a close relationship up until the internet boom of 2000. Then things go haywire. We can also see that the per capita rate of revolving debt started to accelerate after 1983. It continued to increase at a rate greater than the inflation rate until 2007 when it started a decline despite a much larger number of wage earners and inflation. This leads me to conclude that the wage earner’s debt was maxed out in 2007.

The next question I had was where does the per capita revolving debt go from here? One way we can make an intelligent guess at the answer is to go from the premise that per capita revolving debt should have grown at the rate of inflation. Using a regressed line of the CPI to provide us with the slope of the line, we would expect that per capita revolving debt still needs to drop another 10% to reach the point that inflation rate would have predicted. Since the wage earner was probably maxed out in 2007 I think the wage earner is unlikely to add more debt any time soon. They are still close to their max debt load. If we assume that wage earner’s tolerance for debt and inflation rates does not change dramatically then it make take another year or two for the wage earner to pay down enough debt and establish enough distance from their max debt level. On the negative side if the wage earner gets panicky about the future of their job and the economy,  there might be some debt repayment overshoot. The logical conclusion is that this new normal for revolving debt will be bad news for the companies whose sales are dependent on revolving debt and make if very difficult for this economy to expand for the next two years.

Financial Events That Caught My Attention Last Week

Unlike most of the media the debt ceiling debate I thought the debate went as expected. After watching the budget debates in California, Illinois, New Jersey, and Wisconsin I was expecting the debt ceiling debate to be ugly and to satisfy no one. However the most interesting financial result from the debt ceiling agreement was the movement on the 10 year Treasury bond. So while the media pundits were still talking about rising interest rates for consumers, the 10 year bond continued to go in the opposite direction. That left me to conclude that the big financial issue driving the dollar higher and the treasury bond rates lower was the combination of the Eurozone blowing up and the United States economy stalling. It is got to be hard on the Chinese. Their best export market was tanking and their plan of using a basket of currencies to replace the dollar as the reserve currency was going down along with the Italian and Spanish economies. If the world economy is slowing down, the domestic issues confronting the Chinese are likely to heat up. It is likely that the average Chinese worker will think that they got the raw end of the economic boom.

Another weird economic report was the Federal Reserve report on consumer debt,  As a fan of Dave Ramsey,, I believe that the economic health and wealth of the United States depends on more Americans becoming debt free. It obvious to many people that Americans have too much consumer debt and it is time for the debt pendulum to start swinging back the other direction. Getting our fiscal house in order starts in our own home first. The G19 report by the Federal Reserve was showing that Americans were making some progress in 2009, 2010, and 2011. In 2009 and 2010 the debt went down at rate of ”“4.4% and -1.7% respectively. In 2011 the rate rose at rate that was comparable to our inflation rate, 2.1%. In June our accumulation of debt accelerated to about 7.7 percent from 2.5 percent in May. This drove up the preliminary rate for the second quarter to 4.4% and well above the inflation rate. Both cars and credit card purchases contributed almost equally.

Maybe we will get lucky. The price of crude oil continues to dive as the world economy slows down. It appears that once again we are looking at a mixed bag of inflationary and deflationary indicators. Inflation and deflation continues to be my biggest fears for the United States economy.

More evidence implicating consumer credit in the subprime mess


SO I’M WATCHING MCCAIN TALK ABOUT THE SUBPRIME CRISIS, and how there may be some “greedy people on Wall Street who need to go to jail.”

But I heard a typically sad-toned NPR story on subprimes tonight, and despite their best efforts to evoke the Joads it was a story of people who “used their houses like ATMs,” taking out home equity loan after home equity loan when they started with a subprime mortgage, only to wind up owing far more than their houses were worth and unable to make the payments. Boo hoo. Shouldn’t there be a price for being an idiot? …

SO I’M WATCHING MCCAIN TALK ABOUT THE SUBPRIME CRISIS, and how there may be some “greedy people on W…
Glenn Reynolds
Thu, 31 Jan 2008 01:34:18 GMT

Don’t get me wrong! I still think that there is a good possibility that there were unscrupulous mortgage brokers who took advantage of prospective home owners. However, the elephant in the room is credit card debt. As I have said in a previous post, our only chance is if the government chooses to scale back the credit card debt problem and tighten the mortgage rules at the same time we rescue these “victims”. If we continue to ignore our addiction to credit card debt, we will repeat this financial crisis again.